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By Joe Arnold, AIF®
We are just weeks away from the much-anticipated 2020 presidential election. Debates are in full swing, the political news cycle is endless, and we’re hearing plenty about the platforms the candidates are campaigning on, everything from healthcare to immigration to—of course—the economy.
While it’s normal to hear about potential tax changes, jobs, and trade policies at this point in an election year, the impact of COVID-19 on our economy has made politicians’ promises to decrease unemployment, cut taxes, and increase GDP even more attractive. But an important question remains: How much power does the President really have over the economy? Will their plans really make a difference?
The Limits Of Power
Well, the short answer is: It depends. Presidents are usually awarded praise or denounced as failures depending on the state of the economy during their tenure in the Oval Office. But the economy is a complex, many-faceted system, and the President has more influence over some aspects of the economy than others.
In reality, the President doesn’t have much control over the stock market (although the choices they make can certainly have effects on investor confidence and market performance). But how the market is performing at the beginning or end of a President’s term in office isn’t necessarily reflective of their choices. It may have more to do with the naturally occurring cyclical nature of market performance, socio-political changes, or myriad of other factors which can impact the market’s performance.
For example, history tells us that there is no trend driving the market returns of a particular political party, and the President probably shouldn’t receive much credit or blame for stock market performance during their term, as evidenced below in the hypothetical growth of $1 invested in the S&P 500 since January 1926 until December 2019.
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As you can see from the chart above, the party that controlled the Oval Office didn’t have as much impact on the markets as events that occurred like the Great Depression, World War II, the tech boom in the late 1990s followed by the crash in 2001, and the Great Recession in 2008 followed by the recovery. Similarly, the party that controls Congress also doesn’t show any pattern of market performance.
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Which brings us back to our original question. What influence does the President have? Common powers the President does have include (but are not limited to):
Proposing fiscal policy (i.e., tax law) and regulatory policy
Appointing Federal Reserve governors
Responding to external shocks and crises
Fiscal And Regulatory Policy
Upon entering office, the President steers fiscal and regulatory policy. The tax and regulatory policies they propose, if passed by Congress, have major effects not only on how citizens are taxed but also on how businesses are taxed and regulated. Proponents of lower taxes argue that lowering taxes leads to greater economic activity by incentivizing companies to hire more people and invest in research and infrastructure. However, tax cuts do not always correspond to job creation and business reinvestment. Companies may use this cash for other purposes like buying their own stock instead. And ironically, unemployment has been the lowest in our history at times when corporate income taxes were the highest.
The President also oversees some regulatory policy, which aims to strike a balance between efficiency and equity. Regulatory policies limit what can be done in the marketplace to protect vulnerable consumers, and applies to many industries, such as finance, manufacturing, and energy sectors. Deregulation may be better for businesses, as less regulation frees up resources they can use for more productive goals, thus boosting the economy. However, deregulation may also result in customers being exposed more to fraud, excessive risk taking by companies and higher levels of inequality which in turn could negatively affect the economy.
The Fed
The Federal Reserve (more commonly known as the Fed) is an independent agency from the federal government that provides the nation with financial stability and flexibility. In addition to supervising banks and other financial institutions, the Federal Reserve oversees monetary policy, which can involve governing interest rates (among other things) to achieve macroeconomic policy objectives.
Although the Fed is an independent agency, the President appoints the seven members of the Board of Governors. Their terms are meant to be staggered and can last up to 14 years to maintain independence from the Oval Office. Of these seven members, the President also nominates the chair and vice-chair for the Federal Reserve. The President’s appointees work to fulfill the President’s goals for national employment, price stability, and financial stability.
External Shocks And Crises
The President is also responsible for making economic decisions in response to external shocks and crises. The global pandemic has jolted national economies around the world and affected American citizens across all income levels. Other external shocks that might require the President to respond economically include oil price wars, natural disasters, and warfare.
Financial Planning In Uncertain Times
Ultimately, any President’s tangible influence over the economy is uncertain and difficult to prove. The economy is driven by many complex factors, and policies implemented in earlier presidential terms can have long-term, far-reaching effects that current economists may not realize in short-term analyses.
Whatever questions you might have, we can help you answer them. At Foundation Wealth Advisors, we are serious about our job of stewarding our clients’ finances well, and part of that stewardship involves continually educating ourselves and you about relevant economic changes, and helping you make the most optimal financial decisions. If you’d like to feel more secure about your financial and retirement plans, consider partnering with a financial advisor who takes your full financial situation into account—current economic environment included. Schedule a complimentary appointment by calling (440) 899-7535 or emailing me at jarnold@foundationwa.com.
About Joe
Joe Arnold is an independent financial advisor and the founder and president of Foundation Wealth Advisors, LLC, an independent firm whose advisors provide private investment management for individuals and families, as well as retirement plan consulting for small and mid-sized businesses. With almost 20 years of experience in the financial industry, Joe specializes in providing objective advice to individuals, as well as transparency in building and managing company 401(k) retirement plans. He is committed to putting his clients’ best interests first in all decision-making and recommendations. Based in Westlake, Ohio, he serves clients in the Cleveland, Akron, and surrounding areas, as well as throughout the country. Joe received a bachelor’s degree in business administration from Cleveland State University and is an Accredited Investment Fiduciary® (AIF). He has been featured on national television, including CNBC and FOX Business, and quoted in various publications, including The Wall Street Journal, CNN Money, Forbes, and others. Joe lives in Rocky River, Ohio, with his wife, Allison, and their two grown children, Kevin and Keira. An avid golfer, he is a former Class A PGA of America teaching professional and NCAA Division 1 athlete. When he’s not working, he enjoys playing golf, working out, and honing his culinary skills. To learn more about Joe, connect with him on LinkedIn
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(2) https://darrowwealthmanagement.com/blog/stock-market-performance-by-president-in-charts/